The Government has taken several steps as part of its COVID-19 Economic Response Plan to mitigate the taxpayers’ difficulties. These measures include filing extensions and deferrals to pay individuals and companies to deal with involuntary company closures and self-isolation.
For reports filed and payments made by the Government’s extended deadlines, which differ by taxes and taxpayer group (“COVID-19 relief periods”), the CRA declared no fines and interest would be levied. However, the CRA will not automatedly waive fines and interest on tax balances beyond the relief periods for COVID-19. This means that tax balances before the COVID-19 outbreak will continue to be charged for those that remain outstanding after the conclusion of the COVID-19 relief periods. The CRA has stated that it would accept applications by taxpayers to suspend or waive fines and interest on tax balances not protected on a case-by-case basis under the COVID-19 relief periods and that such applications shall be granted priority until their business activities are resumed. Since the pandemic will affect many taxpayers, this blog posting summarizes the taxpayer relief provisions.
The Power of the CRA to Waive Sanctions and Interest
220(3.1) Subsection of the Income Tax Act and section 281.1 of the Excise Tax Act grant the Minister, by the CRA, the power to cancel or waive, in whole or in some other way, any penalty or interest payable, by a taxpayer or by a partnership for any tax year or fiscal year of a partnership), which ends in 10 years before the calendar year in which a partnership ends. The ten-year cap for interest applies to the years in which interest accumulated and not the year for which tax was initially payable.
Guidelines of CRA
The CRA’s administrative guidelines are included in Information Circular IC07-1R1: Taxpayer Relief requirements and GST/HST Memorandum 16-3, GST/HST – Cancelled or Waiver of Fines and/or Interest (including the “Waiver Guidelines”).
The waiver guideline notes that if the following forms of circumstances arise and justify that a taxpayer cannot meet a tax duty or requirement: (1) exceptional circumstances; (2) incapacity to pay and financial hurdles; and (3) CRA delaying (‘relief’).
The exemption rules are not legal. Thus the CRA cannot reject a request merely because the taxpayer’s circumstances do not fall under one of the explanations. However, in fact, it is difficult to identify cases in which the CRA issued a relief application, not on one of the grounds.
The Waiver Guidelines include a guarantee for a waiver or cancelation where the penalty or interest occurs from circumstances outside the control of taxpayers, such as natural or human-made disasters, civil strife or service interruption, serious illness or mental disability, or serious emotional or mental distress.
The CRA has traditionally considered the 2013 Fort McMurray floods and the 2018 B.C wildfires and Ontario to be “natural or disasters caused by mankind.” Health problems like the 2003 SARS and 2000 E outbreaks have also qualified. In addition, drinking water pollution was regarded as exceptional circumstances in Walkerton, Ontario, and warranted relief of penalties and interest.
The automatic relief grants for sanctions and other interest occurring in the COVID-19 relief period indicate an ‘extraordinary case’ which the COVID-19 pandemic needs to constitute. However, the extent to which the CRA would consider the pandemic as prohibiting taxpayers from complying for periods beyond the COVID-19 relief periods with the Income Tax Act or the Excise Tax Act is uncertain.
Unable to Pay and Financial Challenges
The Waiver Guidelines allow for a penalty and interest relief if the ability to pay all sums owing has been verified. For instance, relief might be necessary if proven inability to pay requires an extended payment arrangement; if the payment of accrued interest may cause an extended failure to provide essential needs (financial difficulties) such as food, medical care, transportation, or accommodation; or when the taxpayer is unable to make an adequate payment arrangement because of the interest charges. We expect more taxpayers to be in these circumstances because of the pandemic.
For demands made on the grounds of failure to pay or financial distress, taxpayers are usually asked for supporting documentation (such as a bank and credit card statement over the past three months, borrowing and mortgage statements, and financial statements) to provide complete financial reports including a statement of revenue, expenditures, assets, and liabilities.
Unless exceptional circumstances prohibit the CRA from complying, it does not generally consider canceling a penalty based on failure to pay or financial hardship. However, the Waiver Rules recognize that there might be unique circumstances where penalties can only be canceled; for example, when a corporation has severe financial problems and where the execution of such penalties will jeopardize its operations, workers’ employment, and the wellbeing of the entire community.
Delay due to CRA
The waiver guidelines also guarantee the annulment or waiver of fines and interest resulting from the CRA’s behavior. This involves delays or errors in the handling of publicly accessible CRA material, inaccurate CRA advising, CRA delays in supplying the taxpayer with the information required to make the necessary payment, or unreasonable delays in addressing an objection or an appeal or in carrying out an audit.
In its reaction to COVID-19, the CRA declared that all objections relating to Canadians’ right to benefits would be temporarily observed, and audit operations – such as the implementation of new audits, filing information requests for current audits, and completion of audits – have been suspended. The participation in an investigation or an appeal that has been arbitrarily suspended by the CRA due to COVID-19 should be suspended.
The CRA acknowledges that the COVID-19 crisis is an “extraordinary circumstance” by preemptively exempting tax balances from fines and interest in the relief periods of COVID-19. At the same time, the CRA has indicated that for fiscal balances other than the COVID-19 relief periods, it would only recommend waiving penalties and interest on a case-by-case basis. It is fair to expect the impacts of the COVID-19 crisis to remain recognizable based on which such effects persist. Taxpayers facing challenges and difficulties as a result of the COVID-19 crisis should consider demanding relief for periods outside the relief periods of COVID-19.